[OPE-L] Query on intermediate services

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sat Nov 10 2007 - 16:52:54 EST

I have a technical question maybe somebody could help me with. It concerns the definition of intermediate consumption of services in national accounts. 

As is known, in order to obtain a measure of gross value added (or GDP or net output), intermediate consumption (value of goods and services used up) must be subtracted from total gross output (which can be thought of roughly as total sales volume or total turnover). 

In the case of services produced during the year, these are classified either as final outputs (hence part of value added), or as intermediate inputs (hence not part of value added). 

The question is now, how exactly the distinction is drawn between final outputs of services, and intermediate inputs of services. Empirically, this can be done on the basis of the purpose for which the services are used (services "used up" in some sense versus services to final consumers), but I fail to locate any statement of the exact principles according to which this distinction is operated.

One main logical possibility is, that services are defined as intermediate inputs ONLY if they are produced "in house" by the producing entity itself, and as net outputs ONLY if they are purchased from another producing entity. 

This would imply, that if the institutional division of labour increases (more services purchased or outsourced or contracted out, rather than produced in-house) then GDP increases purely as a result of the property relationships involved, i.e. not necessarily because more services are produced in total, but that the services are produced by more different owners.

My hypothesis is that, because more services are nowadays outsourced/subcontracted rather than produced in-house, so that the enterprise focuses more on its "core business", the GDP measure increases far in excess of the total amount of additional services really being produced, in which case economic growth by a GDP measure is overstated, simultaneously by the increase in service outputs, and by the decrease in intermediate service inputs. The suggestion is, that a quantity of new value added is therefore "added" purely because of the change in the ownership relation involved.

The same argument applies mutatis mutandis to intermediate "goods" as well, but the case of services appears statistically much more significant. It affects our understanding of longterm economic growth rates as measured by GDP.

If you have any idea of exactly how the distinction to which I refer is made exactly, I'd be interested to know, because I am trying to establish what the quantitative significance would be, of a strong increase in the institutional division of labour with respect to services, i.e. the effect of subcontracting in this sense.


PS - one of the interesting features of the subprime crisis is that the amount of money lost in the trade of subprime contracts by far exceeds the amount of money lost to the home owners who foreclosed on their mortgages - i.e. all sorts of other financial claims were staked on the mortgage contracts. In general, "financial intermediation" is often just a euphemism for subcontracting.

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